In Negative Equity but looking to Move...

[mcl]

Hi All,

Looking for advice on Negative Equity trade up scenario. I did post on the same topic here about 1.5 years ago and I was advised to sit tight, which I did

Here is high level breakdown of our current situation.

- Outstanding KBC Mortgage on 3 Bed Semi in Kildare - €228K
- Current Value of Mortgage property c. €175K (so approx €53K negative)
- Repayments are currently €1370pm - Principal + Interest @ 4.25% (KBC SVR), I intend to reduce this further asap by Paying the mortgage from a KBC current account.
- Approximately 20 Years remaining on the Mortgage.
- This property is currently rented out @ €850 pm and we are paying the balance of €520pm
- We currently rent ourselves in Dublin and pay €1700pm, so total outlay for accommodation is €2.2K pm :

-Myself and My spouse have our own business with average Gross annual income of 90K.
- We have 2 Children aged 6, 13
- Main outgoings are Car Loan €320pm and all the usual bits, food utilities, fuel clothing, entertainment totaling approx €1000pm
- We have a credit Credit Card with a limit of €1250, this is kept in check.

We are your classic Accidental Landlords in that we bought the house in Kildare in 2007 and then realised that it did not suit us to live there logistically. Whilst we have good tennants we are not really cut out for the job and We would really like to sell up and buy in the Dublin area in which we rent currently (a very common story methinks..)

In summary here is what we are looking to do..

1. Sell the Property in Kildare and Carry the Residual balance of €53K to a new property in Dublin.
2. Average prices of houses in the area we would like to buy in are circa €320K
3. * We do have a lump sum of €45K to contribute which comprises of Savings and Gift from Parents.
4. So we would be looking for a total loan amount in the region of €328K, based on my calcs this would map to monthly repayments of approx €1700pm.

* I know we could lump the €45K off the negative equity and potentially sell the property outright, but then we would be starting from scratch faced with amassing another deposit for a new house as new business?!

One point to note.. We did build up some arrears on the mortgage going back over 3 years ago but we have rectified this and the Mortgage account has had a clear payment profile for just over 24 months now. In fact the Current Balance of €228K includes €10K of over-payments that we made over the course of 1 year, but we have since stopped in lieu of saving this for a deposit.

So what is the likelihood of KBC agreeing based on the above? Should we be going about things a different way.

I know we are €8K short of clearing the Residual Balance, selling the house and walking away Mortgage Debt Free. (Perhaps they would cut us a deal??) We could then continue to rent in Dublin but we really want the security of our own house as our children are very established in terms of friends/schools/sports and we don't want to worry about security of tenure and rising rents.

Many thanks in advance,

mcl

 

[44brendan]

So what is the likelihood of KBC agreeing based on the above? Should we be going about things a different way.

This is surely your starting point! I.e If KBC refuse the 328k mortgage request your plan is scuppered. I doubt very much if they would cut you a deal on the 8k shortfall. Even if they did you would have the problem of raising the deposit on the new property with 45k family funding gone.
Best option at this stage is to approach KBC and put your request to them. A sanction in principle at this stage would give you the flexibility to look for a suitable property.

 

[Brendan Burgess]

KBC is your only option given the negative equity and the impaired credit record.

I would think that they will refuse you. Hold onto your €45k as you will need it when you eventually trade up.

If you are in negative equity, you are exempt from the Central Bank rules. If you pay off the negative equity, you will have to come up with 20% of the value of the property you buy.

Brendan

 

[mcl]

Hi again guys,

Many thanks for the input. Yep I guess the only way forward is to go for it and see what KBC come back with.

@Brendan regarding your comment...

KBC is your only option given the negative equity and the impaired credit record. I would think that they will refuse you.

What would be the key reasons for KBC to refuse the loan? Amount of Negative Equity, Amount of overall Loan, Nature of Our Employment, Previous arrears?

I suppose the worst case scenario for us would be for KBC to insist that the residual balance is cleared in full before they will re-lend at any level? That would see us unable to trade up for a number of years as we would be starting from scratch with the deposit - after we sell our current house and clear the balance.

If we do end up over a barrel with respect to KBC, I'm wondering if approaching a near-prime lenders such as Pepper might be worth while? I see they are coming to market with products tailored for "non-standard" customers i.e. those with slight blemishes on their Credit History. I'm thinking we could possible look to restructure current KBC mortgage to align rental income somewhat with mortgage re-payments) and keep renting the property out so that it pays for itself so to speak. We could then approach the likes of Pepper a few months down the line with our deposit still in hand. Any thoughts?

Thanks once again,

mcl

 

[Brendan Burgess]

What would be the key reasons for KBC to refuse the loan?

Recent arrears is the main problem.

But negative equity as well.

You can always try Pepper but they will charge you sub-prime rates. With a €45k deposit, they might lend you €200k. I doubt if they will lend you €280k.

But to be honest, even if they were prepared to lend it to you, you should not borrow €280k on top of an existing loan of €228k on which you are cash flow negative.

So your only possible option is KBC.

Brendan

 

[mcl]

Recent arrears is the main problem.

But negative equity as well.

You can always try Pepper but they will charge you sub-prime rates. With a €45k deposit, they might lend you €200k. I doubt if they will lend you €280k.

But to be honest, even if they were prepared to lend it to you, you should not borrow €280k on top of an existing loan of €228k on which you are cash flow negative.

So your only possible option is KBC.

Brendan

Thanks Brendan,

I Was talking to one of the non standard business team in KBC, they feelt that there are some positives to this application based on our much improved payment history and the account being in credit, plus we have proof of affordability. I'm going to pull together the necessary bits for KBC and see what they say to the NE Trade Up.

Note: There is a good chance that we will be able to pull together a total deposit of €60K through additional family Gift and the sale of some unwanted items.

This could obviously be used to bring us out of NE in KBC's eyes which is not a runner terms of going after their NE trade up product, but it might better our chances with the Pepper if KBC say no?
Also you are absolutely right about taking on huge levels of debt we would need to look at the purchase price of a new property and set our sights slightly lower, say around the €285K - €300K mark. So Pepper might lend €240K if we had €60K in hand (80% LTV)? I know we would still have the Mortgage with KBC, but perhaps they will allow us to restructure (Split/Increased Term) so that rental income covers the repayments. Also house prices are on the up in Kildare, so the NE gap should narrow and we could sell to clear it down the line.

Lots of maybe's, but here's hoping!

Cheers,

mcl

 

[44brendan]

This could obviously be used to bring us out of NE in KBC's eyes which is not a runner terms of going after their NE trade up product, but it might better our chances with the Pepper if KBC say no?

Difficulty here is that if you are out of negative equity you will need to come up with a 25% deposit to meet with CB criteria. however given your circumstances you may fall into the 15% exception category depending on the new bank's attitude. I would certainly not advise going to Pepper with your 60k and retaining your KBC loan. First of all you will have the meet the advanced criteria for a 2nd home and secondly KBC will have no sympathy for you if you have taken on additional borrowings! In my view this approach would be madness and you risk losing the protection of MARP if anything goes wrong!!!

 

[mcl]

Difficulty here is that if you are out of negative equity you will need to come up with a 25% deposit to meet with CB criteria. however given your circumstances you may fall into the 15% exception category depending on the new bank's attitude. I would certainly not advise going to Pepper with your 60k and retaining your KBC loan. First of all you will have the meet the advanced criteria for a 2nd home and secondly KBC will have no sympathy for you if you have taken on additional borrowings! In my view this approach would be madness and you risk losing the protection of MARP if anything goes wrong!!!

Hi 44Brendan,

Ok I hear you, if rental situation on my First Mortgage goes pear shaped then i'm seriously exposed across both loans. I'm not going to take a rash jump at anything, my intention is to work with KBC to sort out something, and looking at near-prime options will be a last resort.

If KBC refuse the NE Trade up and insist on me clearing the residual balance in full then I may look to take the residual as an unsecured loan with low-ish repayments and take my chances elsewhere with €60K in hand. Its a bit of a minefield and i'm 43yrs old now. I want to try and get something sorted before its too late.

Will update as soon as I get an update from KBC

Cheers,

mcl

 

[mcl]

Hi All,

So KBC came back (quite quickly in fact) and refused the NE Trade-up for the following reasons...

1. The overall loan amount of €328K (New price + NE) is too high when factors such as payment history/arrears and amount of NE were taken into account. I didn't get full confirmation but i'm guessing that the my Self Employed may have had some impact on the Salary Multiplier?
2. KBC wont offer any form of new loan until the residual balance on the current property is cleared, this currently stands at approx €55K. Which is what I feared.
3. They did acknowledge repayment capacity and said that If the residual was cleared then they would be prepared to lend in the the region of €260K, with a deposit requirement of 10% (Subject to the credit approval process, with all documentation in place and a suitable property identified)

So i guess I'm over a barrel on this? Clearing the NE will consume our deposit plus we are still faced with saving min €26K to make up the 10% deposit on a new purchase. In addition we would only be able to buy up to a value of €286K.

Any suggestions welcome.

mcl

 

[44brendan]

The arrears history is likely to have been the main negative factor. Perhaps you also did not meet the surplus income minimum on their repayment calculations. I wonder would clearing the residual car loan balance have made a difference
I don't see why the negative equity issue should be a restrictor. Are they effectively saying that the don't offer any options to change house to those in negative equity? Difficult to see any alternatives here unless they are prepared to compromise on these restrictions!!

 

[mcl]

The arrears history is likely to have been the main negative factor. Perhaps you also did not meet the surplus income minimum on their repayment calculations. I wonder would clearing the residual car loan balance have made a difference
I don't see why the negative equity issue should be a restrictor. Are they effectively saying that the don't offer any options to change house to those in negative equity? Difficult to see any alternatives here unless they are prepared to compromise on these restrictions!!

Hi 44Brendan,

Yes, it wasn't made explicitly clear as to what the key reason for refusal was. All they said was taking all factors into consideration... etc. Perhaps stressing the repayments had some bearing on it, but we are showing current outlay for accommodation of €2,300pm (between rent and mortgage top-up)and getting by fine.

Also forgot to add... KBC did suggest that I could look at selling the property and taking on an unsecured loan to cover the shortfall?! A Win for them!

Their reasoning on this was that a lower loan amount on a residual mortgage balance could be cleared in a short space of time freeing that up as a liability altogether. Clearing down a €53K loan + Interest - wont happen in "a short time frame"!

They also suggested that if the residual could be cleared with a family gift + savings then a savings account could be set up showing more/increased net monthly affordability for "12 months time"?? The simple fact is that if I clear a residual balance and sell the house then I will have severed ties with KBC from a liability perspective and would surely be subject to normal lending criteria if I was to go looking for a new mortgage? I'm not going to be able to save a 10% in 12 months.... never mind 20%!!

Really confusing!!!

Thanks,

mcl